IRS Form 8594: Asset Classes, Allocation, and Penalties

IRS Form 8594, the Asset Acquisition Statement under Section 1060, is the form both the buyer and the seller of a business file with their federal income tax returns to report how the total purchase price was divided among the acquired assets. You each file your own copy, attached to your return for the year the sale closed. The allocation you report controls how quickly the buyer can deduct the price through depreciation and amortization, and whether the seller’s gain is taxed at ordinary or capital gains rates.¹

Who Has to File and When

The filing obligation applies whenever a group of assets that make up a trade or business changes hands and the buyer’s basis in those assets depends entirely on the price paid. Both parties file, independently, attaching Form 8594 to their own return (Form 1040, 1041, 1065, 1120, 1120-S, or similar) for the year the sale closed. For a calendar-year taxpayer, that means April 15 of the following year, or the extended deadline if you file an extension.²

A collection of assets counts as a trade or business if goodwill or going concern value could attach to them under any circumstances. That covers nearly any functioning commercial enterprise. If the business has customers, a reputation, or intangible value beyond its physical assets, goodwill could attach and the form is required.¹

Two boundaries are worth knowing. A straightforward transfer of a partnership interest does not require Form 8594. But if the purchase of that interest is treated for tax purposes as a purchase of the partnership’s underlying assets — the classic example being a single buyer acquiring all interests in a two-member partnership — the buyer must file the form.³ Stock purchases are the other line. Buying the stock of a corporation does not normally require Form 8594; the buyer takes the seller’s stock basis. If the buyer instead makes a Section 338 election to treat a qualifying stock purchase as an asset acquisition, the deemed allocation goes on Form 8883, not Form 8594.⁴

The Seven Asset Classes and the Residual Method

Section 1060 requires both sides to use the residual method for allocating the purchase price. You start at Class I and work down through Class VII, filling each class up to the fair market value of the assets it contains before moving to the next. Whatever is left after Classes I through VI are satisfied lands in Class VII, goodwill and going concern value.⁵

Class I: Cash and General Deposit Accounts

Cash on hand and general deposit accounts like checking and savings. Certificates of deposit are not here; they belong in Class II. Allocation equals the face amount of the cash transferred.²

Class II: Actively Traded Personal Property

Publicly traded stocks, U.S. government securities, certificates of deposit, foreign currency, and money market funds. Allocation is based on trading price on the acquisition date.²

Class III: Debt Instruments and Receivables

Accounts receivable and other debt instruments, plus assets marked to market annually. Receivables are valued at face amount minus an allowance for those unlikely to be collected. Gain the seller recognizes on receivables is treated as ordinary income. Certain related-party and contingent debt instruments are excluded from this class.²

Class IV: Inventory

Inventory and property held primarily for sale to customers, capped at fair market value. Specialized or slow-moving goods often require a detailed appraisal. For the buyer, the allocated amount becomes the cost basis used to calculate cost of goods sold when the inventory is later resold.²

Class V: All Other Assets

Class V is a catch-all: everything not captured by Classes I through IV or covered by Classes VI and VII. The big-ticket items are tangible — equipment, machinery, vehicles, furniture, buildings, and land — but any intangible that is not a Section 197 intangible also lands here.²

For sellers, Class V is where depreciation recapture hits hardest. If you previously deducted depreciation on equipment or a building, gain up to the amount of those prior deductions is taxed at ordinary income rates rather than the lower capital gains rate.⁶ For real property like commercial buildings, unrecaptured depreciation gain is taxed at a maximum rate of 25 percent.

Class VI: Section 197 Intangibles Other Than Goodwill

The identifiable intangibles defined under Section 197, other than goodwill and going concern value. The IRS instructions list:²

Workforce in place — the value of having trained employees already on the job.
Information bases — customer lists, operating systems, proprietary databases, business records.
Covenants not to compete entered into as part of the acquisition.
Licenses and permits that transfer with the business.
Franchises, trademarks, and trade names.

The buyer amortizes these ratably over 15 years starting in the month of acquisition, regardless of the intangible’s actual useful life or the term of any underlying agreement.⁷ A three-year non-compete still gets amortized over the full 15 years.

Class VII: Goodwill and Going Concern Value

After Classes I through VI are satisfied at fair market value, everything left over lands here. Goodwill represents reputation, customer loyalty, brand recognition, and similar value that cannot be tied to a specific identifiable asset. Going concern value reflects the added worth of a business that is already operating. Class VII is also amortized over 15 years, and in acquisitions of profitable businesses it tends to be the largest single line item.²

Filling Out the Form

Form 8594 has three parts. Part I captures general information about the deal. Part II records the original allocation. Part III is used only if you need to amend the allocation in a later year.³

Part I

Line 1 asks for the name, address, and taxpayer identification number of the other party. Buyer lists the seller, seller lists the buyer. Line 2 is the closing date. Line 3 is the total consideration paid. The form also asks whether the buyer and seller provided tangible property or intangibles as part of the deal, and whether the transaction involves a related party.³

Part II

Line 4 is the core of the form. For each of the seven asset classes, enter the aggregate fair market value and the portion of the purchase price allocated to that class. One wrinkle: Classes VI and VII are reported on a combined basis. You enter the total fair market value of Class VI and Class VII together, and the total allocation to those two classes together, rather than breaking them out separately.³

Line 5 asks whether the buyer and seller agreed on the allocation in the sales contract. If yes, both parties should report identical numbers. If no, each party reports its own fair market value estimates.

Line 6 handles contingent consideration and must be completed by both sides. If the deal includes an earn-out or other contingent payment, assume every contingency is met and report the highest amount that could possibly be paid. If no maximum can be determined, describe how the consideration will be calculated and over what period.²

Getting the Values Right

Before filling in Part II you need reliable fair market values for every class. Classes I and II are straightforward. Classes III and IV require a close look at receivable quality and inventory condition. Class V is where most disputes arise, because equipment valuations vary depending on the appraisal method. For specialized machinery or real estate, an independent third-party appraisal is worth the cost.

Transaction-specific transfer costs adjust the amount allocated to the asset they relate to — real estate transfer taxes attach to the real estate, for example. General deal costs like accounting or legal fees do not get assigned to individual assets; they affect the total consideration figure, which then flows through the residual method.⁸

Why Buyer and Seller Pull in Opposite Directions

The allocation creates a natural tug-of-war. The buyer wants as much purchase price as possible assigned to assets that can be deducted quickly: five-year equipment, seven-year furniture, inventory that becomes cost of goods sold right away. The seller wants the opposite — more allocated to goodwill and other capital assets, because long-term capital gains are taxed at a maximum federal rate of 20 percent while ordinary income can be taxed as high as 37 percent. Every dollar shifted between classes benefits one side and costs the other.

If the buyer and seller reach a written agreement on the allocation, Section 1060 makes that agreement binding on both parties for tax purposes. Neither side can file Form 8594 using different numbers than what they agreed to, though the IRS retains authority to challenge the agreed values if it believes they are unreasonable.⁵

Agreement is not required. If the parties cannot agree, each side files its own allocation. This is legal but almost guarantees extra IRS attention, because the agency now has two conflicting reports for the same transaction. Most deals settle the allocation in the purchase agreement to avoid that risk.

Contingent Payments and Amended Filings

Many business sales include earn-outs, holdbacks, or price adjustments tied to post-closing performance. On the initial Form 8594 you report the maximum possible consideration, not just what has been paid so far. If the contingent amount later changes, you file a supplemental Form 8594, completing Parts I and III, with the return for the year the adjustment takes effect.³

Part III captures the year and details of the original filing, the reason for the change, and the revised allocation. This applies whether the total price went up (an earn-out target was hit) or down (a post-closing reduction for discovered liabilities). Any change in total consideration requires you to recalculate the residual amount flowing to Class VII and report the updated figures.²

Related-Party Transactions

Form 8594 specifically asks whether the transaction involves related parties as defined under Section 267 or Section 707. Related-party relationships include family members (siblings, spouse, parents, and direct descendants), an individual and a corporation where the individual owns more than 50 percent of the stock, trusts and their beneficiaries or grantors, and certain controlled partnerships and corporate groups.⁹

The concern is straightforward: related parties can set whatever price they want and allocate it however they choose because there is no arm’s-length negotiation keeping values honest. If you are buying from a family member or from a company you control, expect to need strong documentation — appraisals, comparable sales data, and a clear rationale — to support your filing.

Penalties

Form 8594 is treated as an information return, so the standard information-return penalty rules apply. Filing late without reasonable cause runs $60 per return if you are up to 30 days late, $130 through August 1, and $340 after that or if you never file. Intentional disregard is $680 per return with no maximum cap. Those are the amounts for returns due in 2026, and the IRS charges interest on unpaid penalties until they are resolved.³¹⁰

The bigger financial risk comes from getting the allocation wrong. If the IRS determines that a valuation misstatement caused you to underpay your taxes, Section 6662 imposes an accuracy-related penalty equal to 20 percent of the underpayment.¹¹ On a large acquisition, 20 percent of the additional tax owed easily dwarfs the per-return filing penalties.

How Long to Keep Your Records

Hold onto every document supporting the allocation — appraisals, the purchase agreement, schedules of assets, correspondence about fair market values — for as long as you own any of the acquired assets, plus the period of limitations after you dispose of the last one. The IRS requires records supporting depreciation, amortization, and gain or loss calculations to be kept until the limitations period expires for the year you sell or otherwise dispose of the property.¹²

Because the allocation affects depreciation and amortization stretching 15 years into the future, the practical reality is that these records need to stay accessible for close to two decades.

1
Internal Revenue Service. About Form 8594 – Asset Acquisition Statement Under Section 1060
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Internal Revenue Service. Instructions for Form 8594
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Internal Revenue Service. Instructions for Form 8594 – Asset Acquisition Statement Under Section 1060
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Office of the Law Revision Counsel. 26 USC 338 – Certain Stock Purchases Treated as Asset Acquisitions
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Office of the Law Revision Counsel. 26 USC 1060 – Special Allocation Rules for Certain Asset Acquisitions
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Office of the Law Revision Counsel. 26 US Code 1245 – Gain From Dispositions of Certain Depreciable Property
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Office of the Law Revision Counsel. 26 US Code 197 – Amortization of Goodwill and Certain Other Intangibles
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GovInfo. 26 CFR 1.1060-1 – Rules for Allocation of Basis
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Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers
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Internal Revenue Service. Information Return Penalties
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Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
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Internal Revenue Service. How Long Should I Keep Records?